Question

Consider a country where all money is currently held as cash and the money supply has a value of $2,000. A banking system is developed, and the residents of the country deposit the $2,000 of cash into the banking system and decide they no longer want to hold any cash. If the reserve ratio is equal to 10%, then the banking system has the ability to create $______ of new money and the money supply in the economy will be equal to $ _____.

Answer 1

Answer:

$20,000 and $20,000

Explanation:

Data given in the question

Reserve ratio = 10%

Value of money supply = $2,000

Deposit amount = $2,000

So by considering the above information, the amount to be created

= Money multiplier × deposit amount

where,

Money multiplier is

= 1 ÷ reserve ratio

= 1 ÷ 0.10

= 10

So, the amount to be created is

= $2,000 × 10

= $20,000

And, the new money supply is also $20,000